Question

How does diversification affect systematic and unsystematic risks?

How does standard deviation relate to the general concept of risk?

Answer 1

Systematic risk such as inflation rates, exchange rates, political instability, war and interest rates is not specific to a particular company and thus it cannot be Eliminated through diversification.

Unsystematic risk is specific to a company, industry, market or economy can be reduced by diversification of portfolio. The aim is to invest in various assets So that they Will not All be affected the same way By market events. If some securities have negative performances it is offset by positive returns of some other securities.

Standard deviation measures the total risk of a individual security . It is a measure of volatility,the more a security return varies from it's average return the more volatile is the stock.